Probing for clues in a mysterious proposal

Source: Nick Juliano, E&E reporter • Posted: Monday, March 10, 2014

It wasn’t much of a surprise when Rep. Dave Camp offered no renewal for a key renewable energy production incentive in the sweeping tax reform draft he released late last month.However, the House Ways and Means chairman caught almost everyone following the issue off-guard with his proposal to claw back additional revenue by reducing the incentive’s value by more than a third for those who already received it.At issue is the production tax credit (PTC), which was established in 1992 as a temporary subsidy for wind farms and select other renewable energy projects, valued at $15 per megawatt-hour for the first 10 years a facility operates. The credit has been extended numerous times since, although it is now expired for projects that were not underway by Dec. 31, 2013. Its value has risen with inflation, to $23 per MWh last year.

Camp, a Michigan Republican, proposed eliminating that inflation adjustment for companies already receiving the PTC. So if his draft became law — a near impossibility in the near term, to be sure — any companies that began taking the PTC in the last 10 years would see the value of the credit fall by about 35 percent.

The idea has outraged wind developers, which see the proposal as a betrayal of Congress’ previous obligations, one that will wreak havoc with power purchasing contracts predicated on the PTC’s holding its value once turbines are in the ground and spinning.

Theories abound as to why Camp decided to cut so deep. Several sources tracking the issue suggested he was looking for additional revenue in every nook and cranny of the tax code in order to offset a cut in the overall corporate tax rate to 25 percent, from the current 35 percent.

Some also noted that the deep cut to the renewable credit may have offset the protection of another energy provision that is especially popular among House Republicans.

Clawing back the inflation adjustment would raise $9.6 billion over a decade, according to the Joint Committee on Taxation. That is almost enough to cover the cost of maintaining oil and gas companies’ ability to deduct their “intangible drilling costs,” which JCT has previously estimated averages about $1 billion per year. The IDC deduction was among the only industry-specific tax breaks to survive in Camp’s draft, although oil companies generally opposed the overall proposal because it would eliminate numerous other tax rules favorable to the industry.

The PTC claw-back also could reflect deepening hostility among House Republicans to federal support for renewable energy, in general. A coalition of outside conservative groups, including the American Energy Alliance and Americans For Prosperity, has spent the last several years building opposition to the PTC, and support is growing for Rep. Mike Pompeo’s (R-Kan.) bill to end the PTC and other energy tax breaks.

Or Camp could have been laying down a marker in the likely event that comprehensive tax reform doesn’t happen this year and attention turns to narrower legislation to renew dozens of temporary breaks.

Even the opponents of the PTC were caught off-guard by the Camp draft. It went further than Pompeo’s bill, which would have left companies currently receiving the PTC untouched while ending the credit for the future.

Pompeo said he did not know the origin of Camp’s proposal, and several sources involved in the coalition of outside groups pushing to end the credit said they were similarly unfamiliar with it before it emerged in Camp’s late February draft.

“It seems like asking for that would be getting greedy,” one conservative activist said of the claw-back language.

Bite out of Exelon’s bottom line?

Camp’s proposal could take a bite directly out of the bottom line of a company that has been a leading player in the anti-PTC effort, although the full effect on any individual company also would have to account for the effect of the top-line rate reduction to a 25 percent corporate tax rate.

Chicago-based utility Exelon Corp. has fought tooth and nail against renewing the PTC, which it blames for allowing wind farms to undercut its fleet of nuclear power plants, which already are struggling in unregulated markets with competition from cheap natural gas and waning electricity demand. Nonetheless, the company claims the PTC for at least some of its 44 operating wind farms, earning an estimated $75 million to $100 million last year (Greenwire, Nov. 6, 2013).

That means Camp’s proposal could cost the company as much as $35 million in lost PTC revenue. It also would weaken the effectiveness of a tool Exelon has used to lower its overall effective tax rate, which was 33.8 percent compared to an initial projection of 37.4 percent, according to an exchange on the company’s fourth-quarter 2013 earnings call.

The difference “reflects the utilization of renewable credits,” Exelon’s vice president for tax, Thomas Terry Jr., said on the earnings call. President and CEO Christopher Crane pointed to Exelon’s continued construction of its solar and wind facilities. Camp’s proposal also would do away with the investment tax credit that supports solar energy development.

“You should expect us to be a regular beneficiary of tax credits in lowering our overall tax liability on a cash basis, as well,” Crane said on the Feb. 6 earnings call.

The consequences of Camp’s draft have not caused the company to change its tune.

“The wind industry should celebrate the PTC’s role in making wind a mainstream energy resource, but it is time for wind to compete on its own merits. We applaud Chairman Camp for recognizing that the PTC has served its purpose and should be terminated,” Exelon spokesman Paul Adams said in a statement to E&E Daily last week. “The Chairman’s proposal will lead to a more level playing field, allowing all sources of clean energy to compete on their own merits.”

‘Tweaks’ seen needed for draft bill

Exelon is a lonely voice in support of Camp’s proposal. The American Wind Energy Association greeted its release with an accusation that “retroactive tax increases undermine investors’ trust” in the United States. And industry lobbyists have reached out to their allies on Capitol Hill to press the case.

“I had that discussion with the wind people, and it’s very hard for them to do business when you retroactively” reduce their benefits, said Rep. Dave Reichert (R-Wash.), a Ways and Means Committee member who has previously co-sponsored legislation to extend the PTC through 2016. “They weren’t happy — I’m putting it mildly.”

Reichert said he told the industry representatives that Camp’s proposal is still in its early stages and “there’s still a lot of tweaks to be made to the bill.” Additional input from the industry will be shared with Camp and his staff, Reichert said.

Like everyone else interviewed for this article, Reichert said he did not know the origin of the claw-back proposal. Several requests to Ways and Means Committee aides went unanswered last week.

Reichert said he remained optimistic that Camp could find an agreement with Senate Finance Chairman Ron Wyden (D-Ore.) to enact comprehensive tax reform this year. However, he acknowledged that if that didn’t happen, Congress should pursue “Plan B” and decide how to renew expired breaks such as the PTC.

Wyden is putting together a “tax extenders” bill that would renew the PTC and dozens of other temporary breaks. Some have suggested that Camp’s draft indicates a willingness to renew the credit at the lower $15-per-MWh rate, rather than the current $23-per-MWh rate, although it is too early for extenders negotiations to have really taken off.

“I think there’s going to have to be a discussion of what they do with tax credits — tax extenders” if there is no progress on comprehensive reform, Reichert said. “And what that will include, I have no idea, but it’ll certainly have to be, obviously, a compromise between the Senate and the House.”

Reporter Hannah Northey contributed.